Batman: Arkham Asylum owes its existence to a failed game tie-in for Christopher Nolan's "The Dark Knight" movie developed by EA and Pandemic Studios. Because Pandemic was unable to finish the game in time for the release of the movie, EA $100 million in revenue and Pandemic was forced to close in 2009. With Eidos in control of the game license, they charged British game developer Rocksteady Studios with creating the next Batman game, which became Arkham Asylum.

After clearing a Predator Mode room of enemies in the Greenhouse, in the next room a cutscene plays of the Joker throwing an asylum guard into electrified water. The player must then go to the generator room to shut off the power so they can cross. If the player cuts the power in the side room before triggering this scene, however, the scene featuring the guard will be skipped, cutting straight to Joker walking out of the room.

Many of the game's design elements were inspired by Grant Morrison's Arkham Asylum: A Serious House on Serious Earth. Producer Nathan Burlow stated the narrative and atmosphere of the BioShock and Eternal Darkness influenced the design. Director Sefton Hill said gadgets and abilities that can be combined and used in different ways was inspired by The Legend of Zelda and Metroid.

The developers used key words for each area to help define what each environment would look like. The Maximum Security area was intended to look industrial Gothic, claustrophobic, retrofitted and like a bunker. The Medical Wing was meant to inspire horror, use metal work, employ verticallity and host more Victorian elements. The Catacombs aimed to feel oppressing, focus on the earth and use brickwork. This type of differentiation helped the team flesh out most of the levels and set pieces.

The game's combat went through several iterations before the final product. Rocksteady originally developed the game's combat as a full rhythm action game. It was later set in 2D, which involved colored circles crashing into each other during fights; the final system was based on this 2D model. However, combat was later designed to be unique for Batman, and was given a simple control scheme to reflect the ease with which Batman can perform the moves.

The design team isolated the components that they felt made Batman, and exaggerated these elements. Design ideas which contradicted these facets of the character were dropped, and other elements of Batman, such as his refusal to kill his enemies, were strictly enforced, which provided additional challenges in allowing the player to have complete freedom in the game without transgressing on that fundamental aspect of the character.

Mr. Freeze was planned to appear in the game, but was removed because the character has no personal grudge against Batman or Joker, as such he would not fit within the story. Freeze's cell can still be found in the Asylum's penintentary, however.

The Mad Hatter was also planned to appear in a garden maze controlled by Poison Ivy. This was removed when developers found it didn't match the game's tone. However, the Mad Hatter's riddle was still placed in the garden area.

Batman's signature vehicles, the Batmobile and Batwing, were considered to be playable in the game. But the idea was dropped when developers felt the unique control mechanics and gameplay segments for them would have taken too much time, and compromised its quality. The vehicles appear in the game, but players cannot control them.

ArkhamCare, a fictional website for Arkham Ayslum, can be heard being advertised on PA systems throughout the game. At the time of the game's release, going to this URL would lead to an actual website with details about the asylum and treatments. The website has since been taken down.

In the Arkham Penitentiary Control Room where Clayface is being contained, there is a strange inmate pacing around muttering to himself in one of the cells. This character is Luke Oliver, who won a contest to have his face rendered somewhere in the Arkham Asylum video game. His name is also on the Joker's Party List.

The sequel, Arkham City, had plans made as early as 6-8 months before Arkham Asylum was complete. A secret room was placed within the warden's office, which was filled with concept work and initial ideas. The room remained hidden for six months following the game's release until Rocksteady themselves revealed that it was in the game.